For many people, budgeting feels like a restrictive diet. Money comes in and they shovel money into saving or into debt repayment leaving little to live on. After a few weeks of restriction, they can’t handle it and “binge” where they’ve felt deprived.
We’re partnering with Simplifi to show you that building an effective spending plan doesn’t need to be difficult.
Approach your spending plan with an open mind and a willingness to embrace technology, and you can find a plan that works for you. Here’s how you do it.
Looking for an app to help you build an effective spending plan? Check out Simplifi here >>
1. Start With Your Income
An effective spending plan or a budget always starts with income, not expenses. Most people could spend an unlimited sum of money, but income limits them from that spending.
To develop a spending plan, you need to know your income. This is particularly important for lower-income people to estimate, but it's important for everyone. Whether you earn $1,200 a month or $12,000 per month, your spending plan depends on your income.
Budgeting apps like Simplifi can help you by recognizing your monthly income. Most people experience small income fluctuations from month to month. Sometimes you work more, sometimes less. These fluctuations don’t need to derail you from building an effective spending plan. You can easily build your plan based on your average monthly income.
However, some people, especially college students, have variable incomes. After earning $7,500 over the summer, they may earn just a few hundred dollars per month during the school year. Folks in these circumstances should do their best to build up savings during their working seasons, so they can cover lifestyle expenses during the rest of the year.
For this case study, we’ll consider a young professional who earns $3,200 per month from her W-2 job (after 401(k) contributions, health insurance, and taxes) and an average of $600 per month from charging scooters. Her average total income is $3,800 per month
2. Enter Your Fixed Expenses
Fixed expenses (also called bills) are expenses that you pay each and every month. Typically rent, insurance, cell phone expenses, utilities, debt payments, and memberships fall into this category.
Since these expenses don’t fluctuate from month to month, you can build your spending plan around these. In this case study, the young professional has the following fixed expenses:
- $650 - rent for her half of an apartment
- $100 - half the utilities (including a Netflix subscription)
- $428 - student loans
- $379 - car loan
- $83 - car and renters insurance
- $15 - cell phone
- $35 - gym membership
In total, her fixed expenses are $1,690 per month. After accounting for these fixed expenses, she has $2,110 for other expenses.
Although these expenses are called “fixed” expenses they aren’t truly written in stone. Most people can cut back on these expenses by moving to less expensive accommodations, downgrading their car, or canceling subscriptions.
You can also plan for expenses - these things may not be fixed but you know they will be coming!
3. Automate Your Savings
Effective spending plans incorporate short, medium, and long-term savings goals. Setting money aside for future spending can help you ensure you have access to money when you need it. One of the easiest ways to meet your savings goals is to automate savings. You can set up automatic transfers from your primary checking account to online savings accounts designated for savings goals.
An app like Simplifi can help you figure out how much to set aside for each of your major goals. Once you know the amount, you can set up automatic transfers to ensure you stick to these goals. It can be helpful to schedule these transfers the day your paycheck hits your bank account.
In this case study, the young professional has goals to save for retirement, emergencies, Coachella, a wedding, and snowboarding passes. Based on her goals, she transfers the following funds to other accounts.
In total, she puts $1,310 into various accounts. After fixed expenses and savings, the young professional has $800 left over.
4. Keep An Eye On The Leftovers
An effective spending plan gives the planner a lot of freedom within the constraints of income. The Simplifi Spending Plan lets you know what you have left to spend or save, taking into account your income and bills. Some people want to forecast where every penny of this money will go. They may use spreadsheets or traditional budgeting apps to manage money in a detailed way.
Other people don’t want to bother with detailed categories. They prefer greater flexibility. One month they may spend a lot on groceries (inspired by the Great British Bakeoff), but the next they get take-out ten times. As long as they are on track, they want complete freedom to splurge.
The young professional in our case study falls in between the two extremes. She wants to keep an eye on her eating-out budget because she knows that she knows that can fall into an expensive takeout rut. Aside from her eating-out budget, she likes to create weekend spending budgets to make sure her weekend spending makes sense.
The month in question she spends the following:
- $57 on restaurants and takeaway (of a $90 budget)
- $318 on groceries
- $290 on a weekend getaway with her sister (Venmo transaction)
- $96 on gas
Overall she spent $761 of her $800 budget.
One of the best ways to keep an eye on spending is to use cash envelopes. However, that solution doesn’t work particularly well in a world of digital spending.
Apps that track spending can also be a powerful alternative to cash envelopes. For example, Simplifi allows users to create watchlists to keep an eye on their spending. Users can watch their monthly spending, or even set limits for a set time. The app gives alerts as users approach their spending limits.
5. Putting The Plan Into Action
The best-laid plans can go awry if they are unrealistic or unwieldy. A spending plan that looks effective on paper may be hard to implement. If you’re not detail-oriented, you may forget about a bill and overspend in another category.
Even when you have a plan, cash flow management can be a challenge. My preferred approach to managing cash flow is to automate everything. I line up my automatic bill-pay and my automated transfers with the day my paychecks hit the account. Whatever I have leftover I can spend. Unfortunately, this type of automation takes time to put into place, and it may have to be tweaked when cash flow gets tight.
Predictive reporting can help them manage their money without having all the automation in place. Many budgeting apps are starting to build these predictions into the app. The app can remind you of upcoming bills, so you don’t overspend the day before your rent is due.
For example, Simplifi projects your account balance for up to 30 days. The app forecasts all of your bills and accounts for your savings objectives. Then it reports how much money you can spend today, tomorrow, and for the rest of the month. If your bank account is going to dip, you’ll know ahead of time. This can be especially important to track during lower-income months when you don’t have as much disposable income.
Spending plans need to be adjusted as your life changes. When you’re young you may live with half a dozen roommates;when your income grows you may cut back on roommates. When you have kids, you may find that most of your discretionary spending gets eaten up by daycare bills.
An effective spending plan doesn’t have to last forever. Continuously tracking your expenses and making adjustments can help you maintain a useful budget on an ongoing basis.
If you're looking for an app to help you create an effective spending plan and modify it over time, you may want to consider Simplifi. It's an ad-free and feature-rich platform that provides easy budgeting tools and powerful insights.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.